Pakistan’s inflation rate has slowed significantly over the past year after hitting a peak of 38 percent, encouraging optimism—though this has had little impact on the common man, who is still struggling to purchase essential commodities that have almost doubled in price.
The country has reached this point through a series of missteps, starting with the political crisis that emerged from the ouster of then-prime minister Imran Khan in 2022, triggering protests that spanned months and paralyzed economic activity. This was followed in 2023 with devastating floods that killed over 1,700 people and inundated vast tracts of agricultural land during the monsoon season, with estimates of the damage exceeding $30 billion. While these crises were unfolding, Pakistan experienced resurgent terrorism, aided by Afghanistan, that sparked further unrest.
The unfortunate aftermath of these issues has been a decline in investment and business, despite the potential in a Pakistan with expansive geography and youthful population ideal for labor-intensive industries like clothing or automobile manufacturing. The incumbent government has made many promises to improve ease-of-doing business, recognizing that the ongoing economic turmoil and a lack of job opportunities are causing a brain drain and encouraging youth to undertake dangerous and illegal journeys through rough seas in overcrowded rickety boats. Amidst all this, Pakistan’s foreign exchange reserves also hit a crippling $3 billion—barely sufficient for a month of imports—before slowly recovering to a comfortable $14 billion today.
Pakistan tackled the crisis through a $3 billion stand-by arrangement with the International Monetary Fund (IMF), and has recently inked a $7 billion staff-level agreement for a new Extended Fund Facility, pending approval of the Executive Board. Unfortunately this has come about after fulfilling punishing prior conditions, including sharp hikes to utility tariffs. Amidst the prevailing protests over electricity bills, the government is hoping to secure some relief from China, a longstanding ally that was the only country willing to invest in Pakistan a decade ago at the height of the war on terror. To overcome these crises, Pakistan must tackle both its internal political issues and the externally imposed tensions, particularly those arising from its not-so-secure western border.